Court Ruling May Cast Shadow Over El Paso Settlement
The D.C. Circuit Court of Appeals has remanded an order
approving the El Paso Natural Gas rate settlement for further
review, citing as its reason FERC's refusal to give Southern
California Edison (Edison) the opportunity to challenge the
agreement based on its status as an indirect customer of the
The ruling was seen by some as a major blow to the 1997
settlement, which spelled out a formula for El Paso and its
customers to share the costs for the huge amount of turned-back
capacity anticipated on the pipeline. Edison led an effort to block
the settlement by offering a counter-proposal of its own, but was
defeated in the end.
The court decision "vindicates what Edison has contended from
the beginning of this proceeding - and that is that the El Paso
settlement needs to be evaluated with the kind of searching inquiry
that it has not yet had. This decision gives the Commission the
opportunity to consider the significant issues that Edison raised
in the context of that settlement," said Kevin Lipson, a Washington
D.C. attorney for Edison.
In short, the appellate ruling "casts considerable uncertainty
about the continued viability of the El Paso settlement," he noted.
But Richard Green, a D.C. attorney for El Paso, sharply
disagreed. "I don't know why it should [undo]" the settlement. "I
think our assumption [is]...we will have to have some more
proceedings at the Commission, but I think following that we'll be
in a position for the Commission to be able to approve the
settlement again," he told NGI.
The El Paso settlement, which has a term of 10 years, calls for
customers to absorb 35% of the fixed costs of unsubscribed capacity
over the first eight years of the agreement - $254.8 million -
while the pipeline would be at risk for the remaining 65% during
that period. Beginning in 2004, El Paso will assume full burden for
all of the unsubscribed capacity on its system. The amount of
capacity expected to be turned back to El Paso was put at 1.6
Bcf/d, or about one-third of the total capacity on its system.
In the settlement proceeding, Edison argued that in its role as
an indirect purchaser of El Paso capacity from Southern California
Gas (SoCalGas), it had the right to challenge the rate that
SoCalGas, a consenting party to the settlement, would agree to
under the settlement. The Commission dismissed the California
utility's argument, however, and approved the settlement as
uncontested. In doing so, FERC denied Edison the chance to be
severed from the settlement as a contesting party based on its role
as an indirect customer, which prevented it from pursuing its
objections at a hearing before an administrative law judge (ALJ).
The court reversed the Commission for refusing to sever Edison
as an indirect customer, saying this action failed to meet both
court and FERC precedent. It specifically cited a 1990 court
decision involving Tejas Power. And it gave FERC three choices: 1)
appropriately sever Edison as an indirect customer of El Paso; 2)
review the settlement in light of the general issues of material
fact that Edison has raised; or 3) make a determination that
SoCalGas had the same interests of Edison and, therefore, was
protecting Edison's interests when it agreed to the settlement.
As to the severance option, Lipson thinks that will be "very
difficult to do" since the "dollars that are allocated to Edison
from SoCalGas on an indirect basis" fall under the jurisdiction of
the California Public Utilities Commission, not FERC. On the latter
point, the court said that the Commission's attempt to show that
SoCalGas's interests were "congruent" with Edison's was "too
confused to pass muster." If options one and three are eliminated,
that would leave the Commission with no other choice than to
re-open the settlement proceeding.
Although FERC refused to sever Edison as an indirect customer in
the settlement, it did sever the California utility in its role as
a direct purchaser of capacity from El Paso. Edison has much more
money at stake in its role as an indirect customer, Lipson said.
In the wake of the court ruling remanding the El Paso rate
settlement, the Commission last week in an unrelated case clarified
the standards and procedures that it follows in settlement cases
where contested issues are raised.
FERC's action was largely in response to industry criticism of
an October order in which it remanded a contested rate settlement
involving Trailblazer Pipeline to the presiding ALJ for further
review in light of "substantial objections" raised by Amoco
Production. To avoid having to rule on the merits and possibly
jeopardize the settlement, it chose to send the agreement back so
parties could resolve the contested issues.
FERC rejected rehearing requests last week [RP97-408-004],
pointing out it has been reversed in cases "where the court found
that the Commission did not give sufficient consideration to the
interests of the contesting parties, even if the settlement had
wide support and there was only one or very few contesting
parties." Both the El Paso and Trailblazer rate settlements have
had wide support from customers, with few contesting parties.
Last week's order reviewed several FERC-approved contested
settlements that the courts were not "receptive" to, including El
Paso. "The court remanded the El Paso case to us because we had not
applied the right standards in ruling on that contested
settlement," a FERC staffer said, adding that in Trailblazer "we've
laid out what we understand the right standards to be for the
The Trailblazer order also addressed, among other things, the
issue of severance. Specifically, it said severance was
"problematic" for indirect customers since their rates are passed
through by a direct customer which may have agreed to the
settlement. If the indirect customer is allowed to litigate its
concerns it also will affect the rates of settling customers.
The order suggested it might be easier for the Commission to
carry this out in the future if parties proposing a settlement were
to include a method for severing a contesting indirect customer,
which "fully protects its interests."